Corporate Tax

Treasury Division proposes limits on recorded losses to cut back corporate tax

National Treasury and SARS released tax drafts for public comment this week.

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  • The national treasury released tax drafts for public comment earlier this week.
  • In particular, there are plans to limit companies’ tax loss carryforwards into a new year, which may result in them having to pay more taxes.
  • Among other important proposals affecting retirees and emigrants, the Treasury Department is also aiming to tackle abuses with tax avoidance measures.

The Treasury Department and the South African Revenue Service (SARS) have issued proposals to limit estimated losses to businesses that could help lower the corporate tax rate.

The drafts for the 2021 Tax Acts – the Rates and Amounts Act and Amending Revenue Acts, Amending Tax Laws Act, and Amending Tax Administration Acts – were released for public comment this week. They contain tax proposals from the 2021 budget announced on February 24th.

Suggestions include limits on estimated losses that a company may carry forward into the next fiscal year.

For example, if a company made a loss of R100,000 one year, it would normally carry the entire amount forward to the next fiscal year. If the company made a profit of R100,000 that year it would essentially make up for the previous year’s loss and would not be taxed on profits.

But companies can now only carry forward 80% of their estimated losses. So if you lost R100,000 in one year, you can only bring forward R80,000. This means that the hypothetical profit of R 100,000 in the next year would be reduced to R 20,000 – which is taxable. This change will take effect on April 1, 2022.

Jean Du Toit, Head of Tax Technical at Tax Consulting South Africa, emphasized that this was part of the Treasury’s goal to create leeway to lower the corporate tax rate from 28% to 27%, as Finance Minister Tito Mboweni announced earlier this year .

Billy Joubert, Senior Associate Director at Deloitte South Africa, said the government was essentially “giving” on one side and “taking away” on the other.

Ultimately, lowering the corporate tax rate will be good – as it attracts investment, Joubert said. “They [government] want to do this without losing tax revenue, and the way they do it is to limit the extent to which companies can use valued losses, “he said.

In its budget review, the Treasury Department said it is reducing the number of tax incentives, spending deductions and estimated loss offsets – with the aim of lowering corporate tax. “These changes are designed to improve the efficiency, transparency and fairness of the corporate tax system while promoting economic growth through improved investment and competitiveness,” the budget review said.

The Treasury Department said lowering the corporate tax rate will have positive effects on wages and employment and encourage additional investment.

“We cannot afford to forego tax revenues, but by capping the reported losses we can lower the corporate tax rate. The lower you can make your rate the better,” added Joubert.

Other measures include curbing abuse of employment tax incentives. Du Toit pointed out that some employers wrongly claimed to employ workers to take advantage of the incentive. For example, they would name a student or apprentice in the company with an employment contract – if it is not necessarily an employment relationship. The definition of “employee” is changed to clarify what an employment relationship is so that the company is eligible for the incentive.

There are also proposals to curb abuse related to wealth transfers related to trusts. People started creating fake loans to invest assets in trusts to evade tax debts, Du Toit explained. However, since then the government has introduced anti-tax avoidance provisions through Section 7c of the Income Tax Act. “They [government] had to change it every year as people come up with new schemes to bypass the law, “he said.” It is clear that the government is keen to close all loopholes on trust structures, “he added.

Other proposals include increasing flexibility for pension fund members – who are currently constrained in terms of the pensions they can earn, Du Toit said.

The emigrants also need to be aware of the changes that can affect their retirement provisions, said Joubert.

To prevent South African pension claims from escaping taxation after a person leaves home, it is suggested that a person have left their retirement fund the day before they leave home, creating a South African tax liability, Du Toit said. This is essentially a redemption fee – but it is only payable upon withdrawal, he added. “The tax is levied on the value of the interest on the day before the end of residence and is calculated using the flat tax tables in force at the time of payment,” he said. The provision comes into force on March 1, 2022.

Du Toit said taxpayers should speak to their advisors to understand how the proposed changes will affect them. “In particular, South Africans who plan to leave the country and give up their tax residence need to ensure that they are optimally planned before the 2022 deadline,” he said.

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